Better for CCT to redevelop Golden Shoe site sooner

SPECULATION has resurfaced lately that CapitaLand Commercial Trust (CCT) could soon begin a redevelopment of Golden Shoe Car Park (GSCP), located in a prime spot in the traditional Raffles Place financial district.

Rumours have been swirling about some of the building's retail tenants being told that they would have to move out around the middle of next year. Some tenants are also on short-term leases.

Located along Market Street, the 10-storey building has office tenants on the top floor, with shops and F&B tenants on the ground floor. The building offers 1,053 car parking lots in addition to being a popular eating place with a hawker centre on Levels 2 and 3.

National Environment Agency (NEA) manages the tenancies, licensing and public health aspects of the hawker centre. Under the state lease conditions for the GSCP site, the government is allowed the "full right and liberty" to use up to 2,614 sq m on the second and third levels on a rent-free basis, as a food centre.

No doubt, CCT will need to clear several regulatory hurdles but assuming it makes sense financially for a redevelopment - presumably into a predominantly office scheme given the location - starting works sometime next year could be ideal for the trust.

First, a quick wrap of some of the key approvals the real estate investment trust (Reit) would be in the midst of securing or perhaps may already have secured.

The government is seen as likely to require a replacement food centre in any redevelopment scheme of GSCP.

Of course, Urban Redevelopment Authority's (URA) planning approval would also have to be obtained for a change of use of the site, which is currently zoned as "transport facilities". A redevelopment scheme can be expected to comprise largely offices and the number of car park lots will likely go down - going by what happened when CCT redeveloped the Market Street Car Park (MSCP) to CapitaGreen between 2011 and 2014. URA may also require, for instance, underground pedestrian linkage of the new project to the Raffles Place MRT Station - all part of a car-lite, green CBD.

As well, CCT will have to pay Singapore Land Authority a substantial differential premium to be calculated as 100 per cent of the enhancement in land value (arising from an increase in floor area and a higher use of the site) as assessed by the Chief Valuer in a spot valuation - as was the case with the MSCP redevelopment. Likewise, no extension can be expected for the balance lease term on the site; GSCP's site has about 64 years' balance lease.

Assuming the differential premium charged by the state makes redevelopment a viable proposition for CCT, here are a few reasons why the trust may just go ahead without further delay.

Yes, Singapore's CBD office rentals have been been sliding in the face af a surge in office completions over the next 12-24 months or so - including Guoco Tower, Marina One, UIC Building and Frasers Tower. However, most office leasing consultants are optimistic the newly completed space would be absorbed by 2020, assuming the way we work does not change drastically (for example, if the co-working trend takes off in a very big way).

If CCT starts demolishing GSCP in the second half of next year, it should be able to complete a new project on site by end-2020. This could be well timed in terms of capturing a recovery in Singapore office demand. Here's another reason why the trust may want to get on with redeveloping GSCP sooner rather than later.

Ascendas-Singbridge plans to begin redevelopment work on the CPF Building at 79 Robinson Road from March 2017 and expects to complete the mostly-office project in the first half of 2020. CCT would not want to lose out in terms of clinching tenants for a new office tower on the GSCP site because it could not get it ready in time.

There is the issue of how CCT is going to finance the construction and differential premium payment for the project.

After it completes the purchase of the remaining 60 per cent stake in CapitaGreen, the Reit's aggregate leverage ratio is projected to rise to 37.7 per cent, not too far off the maximum 45 per cent allowed for Reits. So there is a limit to taking additional debt.

Well, CCT has been studying a potential divestment of Wilky Edge and either part or all of One George Street. If it goes ahead, the sales proceeds would come in handy to help fund the redevelopment of GSCP.

CCT could also issue some perpetuals - bonds with no fixed maturity. The Monetary Authority of Singapore has said it allows hybrid securities such as perpetual debt to be treated as equity for the purpose of Reits' leverage rules, if such securities have the characteristics of a permanent form of capital. All in, it makes sense for CCT to start work on GSCP sooner rather than later.